Do I have to pay out an employee’s vacation at the higher minimum wage rate even though the employee earned all of it at the previous year’s lower rate?

Yes. You must pay out accrued but unused vacation at the employee’s final rate of pay, regardless of the rate of pay at the time it was earned (Lab. Code sec. 227.3). For example, an employee who earned 10 hours of vacation while making $20 per hour and who is then terminated or quits while making $23 per hour will receive $230 in vacation wages on their final paycheck. (Conversely, employees who receive pays cut will be paid vacation at the lower rate upon termination or resignation. Keep in mind, however, that the Labor Commissioner likely won’t tolerate lowering an employee’s rate of pay just before termination to avoid paying a fair amount of earned vacation.)